Lackluster Results Leave Dollar General In Limbo
Price action in Dollar General (NYSE: DG) was without impetus following the release of Q3 results. While the results were good they were entirely as expected and without much to drive the market higher. The key takeaway from the report, however, is that this company has already begun a major growth strategy that could increase its footprint by more than 20% over the next four to five years. In that light, we hope to see shares of Dollar General pull back even a little and open up an even better buying opportunity than what we see now.
Dollar General Results Are Solid But Not Inspiring
Dollar General had a good quarter but not one that we would call inspiring. While the company produced $8.5 billion in revenue and grew double-digits versus the pre-COVID level the take was only as expected. On a comp-basis, same-store sales fell -0.6% on a low-single-digit decline in traffic offset by an increase in ticket average leaving the bulk of the gains to new stores including the highly-successful Popshelf concept that is central to the company’s growth efforts.
Moving down, the company experienced some contraction in the gross and operating margin but less than what was expected. The gross margin fell about 50 basis points to 30.8% on mix, costs, and increased damages while labor cut into the operating results. The operating margin came in at 7.8% producing a YOY decline in operating income but better than the Marketbeat.com consensus estimate for earnings. On the bottom line, the company produced $2.08 in GAAP EPS which is down YOY but up 21% versus 2019 and beat the consensus by a nickel.
The key takeaway here is that cash flow is still strong and better than expected, and fueling a healthy buy-back plan. The company bought back $360 million worth of its shares during the quarter and had $619 million left under the current authorization. The board approved another $2 billion in buybacks at the end of the 3rd quarter bringing the total to over $2.6 billion or about 5.0% of the pre-release market cap.
Looking forward, the company is expecting the momentum to carry through into the end of the year and has raised guidance. The new guidance calls for revenue and earnings growth in a range that is 50 basis points better than previously announced but still down on a YOY basis. The takeaways here are that the 1-year comps have been very tough and we are heading into a normally strong quarter of the year.
The Technical Outlook: Dollar General Slips, Confirms Support
The price action in Dollar General was mixed following the release of earnings but might be confirming support. The price fell about 3% to open near $215 but support has so far been present at that level. Assuming the market is able to carry through with this action into the close of the session we see this stock remaining range-bound with a possible move up to the $230 level. If the market sees value in the expansion of the higher pricepoint Popshelf concept the stock should move higher within the longer-term range of $200 to $240. If not, price action may pull back to the $205 to $210 range but that would not negate the outlook. Dollar General is not growing fast but that is the law of large numbers. This company is growing and by large increments that are going to help it leverage profits for investors and continue to pay its dividend and buy back shares.
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